A franchise agreement differs from a simple intellectual property license agreement. This is because a franchise agreement involves more than just the granting of a license: On the one hand, the franchisee must be granted sufficient rights of use to enable him to fulfill his obligation to apply the system and his obligation to promote sales. Furthermore, the franchisor has additional obligations to provide support. In particular, the franchisor must enable the franchisee, through the transfer of know-how and marketing support, to establish and operate a franchise business within the contract territory. “Know-how” refers to specialized knowledge regarding business management, customer behavior, product presentation, and sales strategies.
The franchisor’s intellectual property rights, which the franchisee is permitted to use in accordance with the franchise agreement, should be specified in the franchise agreement and described in more detail in an appendix to the agreement. In addition, the franchise manual—which, like an instruction manual, describes in detail how the franchise concept is to be implemented and is intended to convey the relevant know-how—is also typically an annex to the agreement and an essential part of the franchise agreement.
Franchisees should pay particular attention to the following points:
The franchisor’s trademarks to be used by the franchisee—often word marks and logos that consist of a combination of word and figurative elements and are protected as word/figurative marks, sometimes also product or packaging designs, and in rarer cases, specific corporate identity (CI) colors—should be listed in the contract appendix and identified by their registration numbers. A copy of the official registration should be attached. German trademarks are registered with the German Patent and Trademark Office (DPMA) and are valid throughout the Federal Republic of Germany. In addition, there are, among others, EU trademarks, which provide protection in all member states of the European Union—including Germany—and are registered with the European Union Intellectual Property Office (EUIPO). Franchisees should ensure that the trademarks listed in the contract are actually registered. In practice, it is frequently observed that the corresponding registration is missing or has merely been applied for. This poses a high risk to the franchisee, as in such cases the franchisee would be paying the franchise fee for rights that do not actually exist, and in the worst-case scenario, third parties holding superior rights could prohibit the use of the “trademarks” in question.
Franchise agreements typically also include a so-called non-infringement clause. This is a provision under which the franchisee undertakes not to infringe the franchisor’s intellectual property rights, in particular not to register the franchisor’s trademarks under the franchisee’s own name. As a supplementary measure, the agreement may also provide for the franchisor’s right to terminate the contract without notice if the franchisee infringes the franchisor’s intellectual property rights.
The defense of intellectual property rights is generally the responsibility of the franchisor. The franchisor is obligated to maintain the licensed rights throughout the term of the agreement. Therefore, the franchisee may generally take action against third parties who infringe these rights only with the franchisor’s (express or implied) consent and authorization. Exceptions to this are contractually possible but are rather rare in practice.
Another aspect of the franchise agreement that is typical for franchise businesses and of central importance concerns the franchise’s external image. The franchise agreement often contains strict guidelines for the design of the store’s furnishings and marketing materials—ranging from stationery and business cards to signage, interior design, and employee uniforms, to name just a few. These designs may—similar to trademarks—be protected as officially registered intellectual property rights, for example, as a German design with the DPMA or as a Community design (“EU design”) with the EUIPO. As noted above, some designs (including product and packaging designs) are also registered as trademarks. Often, the franchisor also holds copyrights to these designs. According to case law, in certain cases even entire store interiors may be eligible for copyright protection. Copyrights do not require official registration to come into existence; therefore, their subject matter and scope cannot be determined based on an official register.
The exact nature of the protection afforded to specific designs should therefore be clearly specified in the schedule to the franchise agreement. The franchise manual should describe in detail the specific use of the designs—that is, how the franchisee implements them in practice.
Another important consideration for franchisees is the question of who pays for signage, special furnishings, etc., and what specific costs are associated with these items. The same applies to costs incurred in connection with (for the franchisee, mandatory and sometimes lengthy) know-how training (travel, lodging, and meal expenses). Unless this is specified in the franchise agreement or its attachments, it is essential to inquire about it and have it set forth (in writing).
Franchisees should not be deterred by a comprehensive manual. On the contrary, such a manual is often an indication of a franchise system with potential for success. This is because it contains the franchisor’s intellectual property rights and consolidated know-how—that is, its core economic assets. Detailed guidelines in the manual demonstrate the effort a franchisor expends to protect these assets and ensure their consistent application by franchisees. A consistent and high-quality brand and design image plays a decisive role not only in the value of the franchisor’s “brand,” but also in the value and success of the individual franchisee.
To protect the franchisor’s know-how, franchise agreements accordingly typically include strict confidentiality obligations for the franchisee. A breach of the confidentiality obligation may result in liability for damages, trigger a contractual penalty, and even lead to the termination of the franchise agreement without notice. Franchisees are therefore advised to exercise the utmost care in this regard.
